UBS raises year-end forecast for MSCI AC World to 830 from 800

UBS analysts are revising their year-end forecast for the MSCI AC World index upwards, citing seven key reasons for optimism. The new target is 830, representing a potential 6% upside by year-end.

“Risk Appetite/tactical signals” are a key factor in UBS’s revised forecast. Their proprietary index suggests a positive outlook, with UBS noting, “risk appetite correlates closely with ISM and is discounting an ISM reading that equates to only 1.5% US GDP growth.” This indicates a potential slowdown that could be beneficial for equities.

Another positive indicator is the expectation of slowing US wage growth. UBS analysts believe wage growth will fall to 3%-3.5%, suggesting “the inflation shock is temporary, helps profit margins and lengthens the cycle.” This aligns with their view that full employment is likely closer to 3% than the 4.1% estimated by the Fed.

The market’s reaction to weaker data is also encouraging to UBS. They observe a “transitioning” market that views weaker data more positively than anticipated.

UBS sees potential for long-term growth driven by advancements in Generational AI (Gen AI). They believe Gen AI could boost productivity growth by 1% starting in 2028, leading to a “warranted equity risk premium” that justifies higher stock prices.

Furthermore, UBS highlights that recent earnings revisions and performance are positive. They note that “lead indicators of earnings revisions” and recent positive earnings reports support the current optimistic outlook.

The potential for an extended pause by the Federal Reserve is another bullish factor for UBS. Historically, extended pauses have been followed by strong equity performance.

Finally, UBS acknowledges the possibility of a “defensive-led bull market” driven by defensive sectors. They also see upside risk, noting that while some bubble indicators are present, factors like stabilizing central bank balance sheets suggest a less risky environment.

While acknowledging potential downside risks, such as high profit margins, UBS believes these are temporary and outweighed by the positive factors driving their revised forecast.